UNIVERSITI TEKNIKAL MALAYSIA MELAKA The Effectiveness of ERP Implementation in Manufacturing Industries Report submitted in accordance with the requirements of the Universiti Teknikal Malaysia Melaka for the Bachelor s Degree in Manufacturing Engineering (Manufacturing Management) By Mohd Iqwan Rizal Bin Embong @ Shamsudin Faculty of Manufacturing Engineering April 2008
ABSTRACT The purpose of this study is to discuss about the effectiveness of ERP implementation in manufacturing industries. This study covers the definition, benefits and the implementation steps of lean tools and techniques. The data collections were divided into primary and secondary data. To run this study, a survey was conducted where the questionnaire have been distributed to the manufacturing companies. The survey consists of respondent and company detail, ERP implementation and reason of not implementing ERP. The data obtained were analyzed using the SPSS programming. The analysis shows that ERP implementation has the effectiveness in manufacturing industries. Keywords: ERP effectiveness, survey, SPSS programming i
ABSTRAK Tujuan kajian ini adalah membincangkan mengenai keberkesanan sistem ERP yang telah diaplikasikan dalam industri pembuatan. Kajian ini merangkumi definisi, faedah dan langkah-langkah perlaksanaannya. Pengumpulan data terbahagi kepada dua iaitu data primer dan data sekunder. Untuk menjayakan kajian ini, satu kaji selidik telah dijalankan di mana borang soal selidik telah disediakan dan di hantar kepada syarikatsyarikat pembuatan. Kaji selidik ini merangkumi maklumat mengenai syarikat dan responden, aplikasi sistem ERP dan keberkesanannya, dan sebab-sebab tidak melaksanakan sistem ini. Maklumat yang diperolehi kemudiannya dianalisis menggunakan perisian SPSS. Daripada analisis yang dijalankan, menunjukkan bahawa perlaksanaan sistem ini mempunyai keberkesanannya di dalam industri pembuatan. Kata kunci: Keberkesanan ERP, Kajian, Program SPSS ii
CHAPTER 1 INTRODUCTION 1.1 Background of Study Organizations today are constantly in search for ways to achieve better business performance and sustain competitive advantages through effective deployment of resources and business processes. To stay competitive in global market, the manufacturing sector needs to improve productivity through upgrading of its primary production technology. Technology can improve overall productivity in different ways through an efficient planning and control system that synchronizes planning of all processes across the organization. Manufacturing firms must achieve a degree of innovative capability in managing a solid information system and on-going changes in supply chain needs in order to gain the advantages on competitiveness world. Through a solid information business system, Enterprise Resource Planning attempts to integrate all departments and functions across a company into a single computer system that can serve all those different departments particular needs like true Enterprise Resource Planning software. For example, a firm could have separate systems for purchasing, order management, human resources, and accounting, each of which would maintain a separate data source. Enterprise
Resource Planning (ERP) is a system that can integrate these into a single system. Companies strategy usually involve reorganization the internal operations, upgrade plant productivity, improving product quality, and reducing manufacturing costs, but companies nowadays are focusing on supply chain strategies as the next planning in organizational excellence. A supply chain is a system of organizations, people, technology, activities, information and resources that related with each other in moving a product or service from the supplier to the consumer. An ERP system could potentially enhance precision across the supply chain strategy by eliminating information barrier and increase information rate by reducing information delays. Hence, there is a reason to believe that ERP used could be related with major gains in supply chain effectiveness. ERP is the next step in a company s evaluation that began with Material Requirements Planning and evolved into Manufacturing Resource Planning. Material Requirements Planning (MRP) is well knows as a software based on planning a production process and a system which control the inventory that used to manage manufacturing processes. Meanwhile, Manufacturing Resource Planning (MRP II) is a method for an effective planning system of all resources of a manufacturing company. ERP is a MRP foundation like MRP II and represents as an extended effort that integrate standardized record keeping that will permit information sharing among different areas of an organization in order to manage the system more efficiently. After the computers began to apply in materials planning for the production, ERP have become the current evolution of a progression of planning tools (Michael D. Okrent, 2006). ERP system works essentially by integrating the whole business information, allowing organizations to manage effectively their resource of people, materials, and finance (Markus et al, 2000). The overall resources of an
enterprise can be planned, managed and integrated through ERP (Ching Chow Yang, 2006). In generally, ERP can be applied to finance, human resources, manufacturing and logistic, supply chain management, and data analysis or throughout the organizational departments. (Wen Tsaan Lin et al 2006). This chapter provides an overview of the research project titled an effectiveness of Enterprise Resources Planning (ERP) system in Manufacturing Industry. The following overview of chapter will state out the effectiveness of ERP system involve the product itself and its implementations throughout the organization. 1.2 Problem Statement To achieve the goal of an organization, various functions such as purchasing, production, sales, human resources, finance, and accounting must work together to integrate the complex system of manufacturing organizations. It is critical for companies to figure out their ways of doing business whether it will fit with a standard ERP package before the checks are signed and the implementations begin. This study also related with the following research problems: a. Current demand on ERP implementation is growing fast, but only a few story of its effectiveness had been told out and relatively few success stories (AMR Research, 1999). b. The implementation of ERP is different compare to traditional information system (Chin Fu Ho, 2004). A lot of effort needs to change on system analysis and design in the software in ERP system but system implementation is a challenging management issues (Holland and Light, 1999).
c. Organizations performance indicators and the implementation of the new technologies will create misalignment in the interaction between important influence of new technology (ERP Effectiveness) on tasks and efficiency indicators, combined with the actual impact on an organization (Leonard-Barton 1988). d. There are a lot of studies about impact of ERP system using interviews, case studies, and industry survey but relatively few reported on substantial performance improvement in several areas of ERP system, such as the ability to provide real time information to customers, shorter production cycle, and on time completion rates (Shih Wen Chien, 2007). Therefore to provide solutions for the above problems, it is important to find out all the effectiveness of ERP system in manufacturing industry include with its disadvantages so that this study will meet the requirements and satisfaction to the companies involved. 1.3 Study Objectives In order to solve above mentioned problems, this study tries to achieve the following objectives: a) To evaluate the effectiveness of ERP system through various companies. In order to evaluate the effectiveness, a survey will be conducted in various companies. Questionnaire will be distributed in order to determine the needs of the workers. b) To determine the disadvantages of ERP system through various companies. In order to complete the study on the effectiveness, it should be compared with the disadvantages to create aware on the uses of ERP.
The questionnaire will be included with company current experience using ERP system along its difficulties. 1.4 Scope and Limitation of Study The study is focus on organization performances after implements an ERP system on their way of business. An effectiveness of the ERP system will be stated out troughs questionnaire in order to complete the study objectives on ERP system. Questionnaire will be submitted on various kind of business in manufacturing industry that implement ERP system on their way of business. Nevertheless, the disadvantages of ERP system also will be study to compare the effectiveness on various organizations. Limited organization will be selected in order to complete the questionnaire because of the focus on effectiveness is to general. Only several factors such as managements system, ERP software, and supply chain management s implementations (as example) that involve only selected companies will be submitted. In order to find out the effectiveness of the ERP system in the manufacturing industries, only one method will be used to gather the information which is statistical survey through the questionnaire form that been submitted to the companies. 1.5 Potential Benefits of Study This study will give benefits to the industry and also the researcher by:
a) The findings on the effectiveness of ERP system can be used by the industries to improve their current ERP software. b) As a reference for academic studies related to ERP system in manufacturing approach. c) Create awareness of advantages on implementing ERP system on various organizations. 1.6 Report Outline This study is divided into five (5) chapters. Chapter 1 is generally about the introduction which consists of problem statements, objectives, scope and limitations of study, potential benefits of study and the study outlines. Chapter 2 is the literature review. Based on the reference gathered, this chapter will state out the effectiveness of ERP system as well as the definition and the introduction to the key words which are ERP, MRP, ERP software, SPSS program and manufacturing industries. Chapter 3 is about the methodology. In this chapter, it discussed the methodologies that were used to gather the data required to support the development and analysis of the study. Chapter 4 discussed about the results of the questionnaire, where the data research about the effectiveness of ERP system will be analyses using the SPSS program. The data required in order determining the used of ERP, the effectiveness and also the disadvantages will be observed. In chapter 5, conclusion and recommendation will be discussed as a development of the study on the evaluation of the effectiveness of the ERP system.
1.7 Report Structure
Chapter 1 Evaluate the problems from the study, and determine objectives and scope covered from the study Chapter 2 Discuss about literature review that equivalent to the title of the study and past research equivalent with the study Chapter 3 Discuss about methodology and approach that been used from beginning to the end of the study Chapter 4 Provides results and data from the questionnaire that been done. Results will be analyses and discusses includes the advantages and disadvantages of ERP system in organizations Chapter 5 Conclusion and recommendation from the study that been done. Figure 1.7: Report Structure
CHAPTER 2 LITERATURE REVIEW 2.1 Introduction This chapter will discuss about Enterprise Resource Planning (ERP) successful performance in manufacturing industries. Facts and findings on previous research in and outside the country that relevant with the problems will be discussed in order to support or to make comparison on objective of study. This chapter also discusses about the past studies related to the project title with the authors, titled of the study and the findings of the studies will be discovered. 2.2 Manufacturing Industries Manufacturing means that a process of transformed raw materials into a finished goods (Kalpakjian and Schmid, 2006). Manufacturing involve in manufactured product where a human activity is a part in order to produce other products. Manufacturing is usually intended for making a mass production of products for sale to customer in order to gain profit. The effect of level manufacturing activity is critical where it can determine the standard of living of its people (Kalpakjian and Schmid, 2006). The word manufacturing comes from the Latin word, manu factus, and it is means making by hand or use a hand to make a thing. The use of word
manufacture is found in 1567 and continue by manufacturing in the year of 1683 (Kalpakjian and Schmid, 2006). Enterprise Resource Planning (ERP) system is important in manufacturing industry. It changes the operational planning tools and combined it with the traditional planning. Also, combination of manufacturing activities and other business functions in manufactured company will produce a new overall ERP system. Various manufacture products typically require several modules in the process that need to be implemented and integrated into a different system strategies. The uses of process mapping is important to guide through overall process activities in manufacture organizations. Ideally, ERP delivers a single database that contains all data for the software modules that being implement in various kind of business in manufacturing, which would include all the key business processes. 2.3 Enterprise resource Planning (ERP) 2.3.1 History of ERP
ERP is a recent trend in the business today. The expansion of ERP software starts in the year 1990's. However, it has been within the last five years that ERP has really in use and seen record revenues by the software companies. In the past, ERP software was used to figure a critical situation and schedule manufacturing processes (Anon, 2007 a). ERP come out with the evolution of Manufacturing Requirements Planning (MRP) II. From business perspective, ERP has expanded from coordination of manufacturing processes to the integration of enterprise wide processes. From technological aspect, ERP has evolved from legacy implementation to more flexible tiered client server architecture (Chin Fu ho et al. 2004). The following table 2.3.1 summarizes the evolution of ERP from 1960s to 1990s: TIMELINE SYSTEM DESCRIPTION 1960s Inventory Management & Control Inventory Management and control is the combination of information technology and business processes of maintaining the appropriate level of stock in a warehouse. The activities of inventory management include identifying inventory requirements, setting targets, providing replenishment techniques and options, monitoring item usages, reconciling the inventory balances, and reporting inventory status.
1970s 1980s Material Requirement Planning (MRP) Manufacturing Requirements Planning (MRP II) Materials Requirement Planning (MRP) utilizes software applications for scheduling production processes. MRP generates schedules for the operations and raw material purchases based on the production requirements of finished goods, the structure of the production system, the current inventories levels and the lot sizing procedure for each operation (Michael D. Okrent et al. 2004). Manufacturing Requirements Planning or MRP utilizes software applications for coordinating manufacturing processes, from product planning, parts purchasing, inventory control to product distribution (Michael D. Okrent et al. 2004).
1990s Enterprise Resource Planning (ERP) Enterprise Resource Planning or ERP uses multi-module application software for improving the performance of the internal business processes. ERP systems often integrate business activities across functional departments, from product planning, parts purchasing, inventory control, product distribution, fulfillment, to order tracking. ERP software systems may include application modules for supporting marketing, finance, accounting and human resources. Table 2.3.1: Evolution of Enterprise Resource Planning Today in the year of technology demand, ERP is the foundation of businesses domestically and globally. It is used as a management tool and gives organizations a great competitive advantage. ERP has been recorded so successfully because companies are using ERP to modify its business processes after the Y2K problem. It is believed that the Y2K agreement issue and the requirement are successful to advance a more productive and efficient work environment in various manufacturing industry after implement the ERP system.
2.3.2 Theory of ERP Enterprise Resource Planning system is works by integrating the whole business information, allowing organizations to manage effectively their resources of people, materials, and finance (Markus et al., 2000). Integrating these business practices allows different areas of the company to communicate with each other by the click of the mouse. ERP also implements and automates business processes, putting them into a useful format that been standardized across the organization. If ERP is been used correctly, it can be an effective management tool. The system will allows managers from all departments to look vertically and horizontally across the organization to see what process are accomplishing or not accomplishing. ERP systems recorded data about historical activity, current operations and future plans and organize it into information that people can use to help derive business strategies. In the manufacturing industry, ERP systems act as the 4M's method which are Man, Money, Materials and Machines (Kalpakjian and Schmid, 2006). This ERP system will integrate these four aspects of business together, and provide a potential value to the company. 2.3.3 Definition of ERP Enterprise Resource Planning systems can be defined as a unified system database for the various system modules that all data and processes within organizations had been integrated by using multiple components of computer software and hardware in order to achieve the integration. It is also a software solution that addresses the enterprise needs taking the process view of an organization, and in term of industry Enterprise Resource Planning is a set of activities that support by multi-module
application software that help a manufacturer or other business manage the all the parts of its business. This bill of material processor can give an opportunity to the communications between previously different groups into a single entity with a common understanding of the product to be produced (Robert J Vokurka et al, 2004). Enterprise Resource Planning system works essentially at integrating the whole business information, allowing organizations to manage effectively their resource of people, materials, and finance (Markus et al, 2000). The overall resources of an enterprise can be planned, managed and integrated through ERP (Ching Chow Yang et al., 2006). In generally ERP can be applied to finance, human resources, manufacturing and logistic, supply chain management, and data analysis (Wen Tsaan Lin et al., 2006). Enterprise Resource Planning systems are complex to be defined and dispersed within and between organizations where in a sense the ERP system are elusive in other meanings the system are in constant flux and to be found everywhere and nowhere (Shih-Wen Chien et al., 2007). 2.3.4 Importance of ERP The benefits of implementing an Enterprise Resource Planning system are endless. First and most important, all ERP systems are focused on the customer and end results. This means better products and services produced and delivered quickly. ERP allows open communication among suppliers, vendors, customers and all other facets of the business.
Second, ERP can put a company with a standard set of business practices across the whole organization. By doing this, it allows each department within the whole organization to operate in the same way. Each department whether in Malaysia, China or other continent will hire the same, order the same and run the operation with a same style according to business needs. Various aspect of ERP implementation can be study academically intended to record the impact of ERP system and the challenges of the implementation project itself. The reason for implementation is based on the organizational inclinations and regarding to change where the focus of implementing the ERP is mainly on the realization for the functions or importance in the ERP system. Enterprise Resource Planning also can improve business performance to the organizations by implement an efficient planning and control system that synchronizes planning of all processes through organizations (Shih- Wen Chien et al., 2007). Solid information systems (IS) are required to competitiveness business that it will aligned with business processes. ERP system can give valuable information as well as enhance operating efficiency by changing the company strategies from developing in-house information system to purchasing application software (Shih-Wen Chien et al., 2007). Enterprise Resource Planning can streamline the business operations and play a role as a key of successful ingredient to gain competitive advantages within the organizations (Zuckerman et al,. 1999). The systems also can help companies by integrating their business functions into a unified and integrated business process. It will create excellent if companies implement more enterprise based systems throughout their organizations (Ike C. Ehie et al. 2005).
In summary, ERP application can help organizations in various ways of business aspect. The common importance of ERP that can be conclude are it helps in reduction of organization s operating cost can be reduced, integrates all parts of an organization, increases the efficiency of operations as a result of the integration, integration on information systems which enables free flow connection of information across the organization and enables consolidation of different software within the organizations. 2.3.5 Disadvantages of ERP There are several disadvantages of Enterprise Resource Planning that can be discussed in this study. The disadvantages of ERP are important to create a comparison between the advantages in order to show the significant differences occurred before and after the implementation of the system. First is time consuming, followed by expensive, conformity of the modules, and features and complexity. Time consuming ERP implementation is longer and can take from six months to several years to complete. The ERP software functions itself will usually be available in used approximately in every six month (Michael D. Okrent et al 2004). Companies that install ERP do not have an easy time to gain the benefits of it. Companies usually will change their ways of business and the ways people do their job after implement the ERP system and this will take times. The important thing is not to focus on how long it will take. It is effective to understand the potential benefits and how to use wisely the system in order to improve the business itself because ERP implementation will take almost between one to three years in average (Stevenson, 2007).
Expensive ERP are expensive to implements. The price includes with general information technology (IT) infrastructure (Michael D. Okrent et al 2004). Cost may be change from thousand dollars to millions and the business process reengineering cost in infrastructure may be extremely high and create result in budget overrun. It is include with the hidden cost of ERP implementation that usually a company will face in the following areas (Stevenson, 2007): 1. Training Training fees for the workers are high because of difficulties of implementing complex as ERP. 2. Integration and testing Hidden cost in ERP such as testing the links between ERP package and other corporate software links. 3. Data conversion Data conversion like moving the corporate information such as customers and supplier record, products design data, and etc. will costs money. 4. Data analysis For an analysis purpose, the data from the ERP system must be combined with the data from external systems. This will charge as the cost of a data warehouse in the ERP budget.
5. Consultants Consulting fees will be charges and usually become higher if it involve outside consulting firm besides of own vendor s consultant. Conformity of the modules The architecture and components of the selected system should conform to the business processes, culture and strategic goals of the organization. A one reason for ERP implementation to fail is the software itself does not fix the one of important business processes for a company (Stevenson, 2007). Features and complexity ERP systems are not easy to be defined and are complex and dispersed within and between organizations because of its system modules and complexity of implementation. Each of the position involves in ERP system in organizations said that these system are elusive where the system itself are in constant instability (Koes Boersma et al. 2005). Nowadays, some of the mid average companies having difficulty on the performance of ERP system that cause them lack of effective evaluation features and models of the system (Shih Wen Chien et al. 2007). ERP system may have too many features and modules so the user needs to consider carefully and implement the needful only.
2.4 ERP Modules MRP/CRP SALES & MARKETING MASTER SCHEDULING BOM (Bills of Materials) ERP SHOP FLOOR CONTROL PURCHASING LOGISTIC ACCOUNTS PAYABLE Figure 2.4: Figure of Modules involve on ERP implementation Figure 2.4 shows an example of the modules that help ERP implementation in the organizations. These following modules will be discussed in term of its definition, description and the relationship with ERP system. 2.4.1 Material Requirements Planning MRP Systems were first been used by George Plossl and Joseph Orlicky in the late 1960s. Material Requirements Planning (MRP) is software based on planning a production process and a system which controls the inventory that used to manage manufacturing processes. An MRP system is used to meet three objectives which are to maintain the lowest possible level of inventory and to plan manufacturing activities, delivery schedules and purchasing activities and lastly to ensure materials and products are available for production and delivery to customers. Companies need to control the types and quantities of materials which they purchase, plan which products are to be produced and in what quantities then ensure that they are able to meet current and future customer demand, all at the lowest possible cost. MRP is used by many
organizations as a tool to deal with these problems. This applies to items that are bought in that go into more complex items. 2.4.2 Bill of Materials (BOM) A bill of materials (BOM) is used to describe the parts list of components such as screw, bolt and nut that needed to complete a profitable product. BOMs are listed in hierarchical order with the top level representing the sub-assembly or end-item. The BOMs that describe the sub-assemblies are referred as a Modular BOMs. Modular Bill of Material (BOM) is a vital part that defines the product structure for an end-item. It also defines the parts, documents, component materials, and engineering drawings in order to complete a sub-assembly. Besides sub-assemblies, a BOM also can define products in the Engineering Bill of Material which called designed product or in the Sales BOM as they are ordered, Manufacturing bill of material as they are built in the industry, and as they are maintained which is Service BOM. These different types of bills of materials are depending on the business need and use which they are intended to use that are available in the ERP system features. 2.4.3 Purchasing Purchasing is defined as a business or organization attempt to purchase goods or services in order to achieve the goals for the enterprise. Although there are several organizations attempt to set standards in the purchasing process, it will create greatly different between the organizations.
2.4.4 Logistic Logistics acts as a managing system that control the flow of goods, energy, information and other resources like products, services, and people, from the source of production to the marketplace in order to meet the requirements of consumers. Logistics management contribute to the supply chain system which plans, implements and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption. 2.5 ERP Implementation 2.5.1 SAP/R3 SAP R/3 is a well known client server based application, that utilizing using a three tiered model. It includes a presentation layer for a client that can connect with the user. The application of this layer houses include integrate all the business-specific logic and the database layer records as well as storing the information about the system including transactional and configuration data (Anon, 2007 b) The SAP/R3 can be used either alone or combined to form business solutions. It functionally suitable for all kind of standard business of all enterprise includes manufacturing firms (Y. Yusuf et al. 2004).
Figure 2.5.1: SAP product implementation process data diagram. Figure 2.5.1 shows the example of one product implementation of process project plan. The SAP implementation process is made up out of four main phases which are: First phase: The project preparation where a vision of the future-state of the SAP solution is being created.
Second phase: A sizing and blueprinting phase where the solution stack is created and training is being performed. Third phase: A functional development phase. Fourth phase: A final preparation phase include with the last tests are being performed before the actual go live. For each phase, the vital activities are addressed and the deliverables or products are explained. The process-data diagram above, gives an overview of all of these activities or processes and deliverables. The four gray boxes depict the four main implementation phases, which each contain several processes that are in this case all sequential. The boxes at the right under the SAP implementation project plan show all the deliverables and concepts that result from the processes. Boxes without a shadow have no further sub-concepts. Boxes with a black shadow depict complex closed concepts. Boxes with a white shadow depict open closed concepts, where the sub-concepts are expanded in greater detail. The lines with diamonds show a relationship between concepts (Anon, 2007 c). 2.5.2 SAP R/3 implementation on Rolls-Royce Rolls-Royce before ERP (Y. Yusuf et al. 2004) Rolls-Royce used over 1500 systems before the ERP project was started and many of the system was developed internally by Rolls-Royce itself over the last two decades. These legacy systems were expensive to operate and difficult to maintain or develop. They did not provide accurate, consistent and accessible data that was required for good and timely decision-making. The major
concern is about the lack of performance assessment such as delivery performance, and quality metrics. These old tradition systems can not relate themselves fully to a modern manufacturing environment. Some of the legacy systems were so old and the problem of the year 2000 compliance problems (Y2K) always occurred within the organizations which results work within Rolls-Royce functionally orientated and various departments worked in isolation. The last major manufacturing system to be developed and implemented by Rolls-Royce was MERLIN. The MERLIN system stands for mechanized evaluation of resources, logistics and inventory where the system was basically a scheduling system which ran same as MRPII system principles. The system was developed in the years of 1980s. Although it was capable to handle all the process data within organizations, it was prone to manual manipulation. The example of the system difficulties is it lack of communication between individual sites. MERLIN often had difficulty communicating with another manufacturing system named IBIS (inventory based instructing system) in the Rolls-Royce Company. IBIS was an older manufacturing system that was used at the Bristol and Ansty facilities. Corporate cost accounting (CCA) was used to financially monitor transactions, which covered pipeline inventory and inter-site transport. This additional system was implements because of IBIS s work in progress was often transferred between sites and could not be tracked accurately causing inventory and stocks take problems to be occurred.